Mortgage: How Can CDCUs Help Their Under-Resourced Members Become Homeowners in Today's Market?
With the onset of the COVID-19 pandemic 3 years ago and interest rates dropping below 3%, many people migrated to the suburbs in search of a better quality of life. The result caused a serious lack of product & pricing wars, driving home values higher and higher. Cash became king and those with the most resources faired the best, leaving under resourced people out in the dark as they are always hit first and hardest during challenging times.
Rates are expected to come down over the next year, according to analysts, but we will probably not see them in the 3 to 4% range for some time, if ever. Fannie Mae estimates rates could be as low as 5.2% by 2024 and housing prices are expected to continue to come down as well, but there are no guarantees that this will actually be the case. Now, with rates fluctuating between the 6 and 7% range, what can Community Development Credit Unions (CDCUs) do to meet the challenges facing these borrowers so they can get into their own homes now instead of waiting and hoping that things will improve down the road?
CDCUs have long been at the forefront of providing lending services to under resourced homeowners in underserved communities. These institutions have a unique focus on serving those who are often left behind by traditional lending institutions. However, in order to maximize their impact and serve more people, CDCUs need to look beyond traditional lending practices and embrace expanded approval guidelines. Expanded approval guidelines refer to the set of criteria that CDCUs use to evaluate loan applications. Traditionally, these guidelines have been strict, which has limited the number of people who can access credit. However, by expanding these guidelines, CDCUs can open up their lending services to more people, including those who have been traditionally excluded from credit access.
One way that CDCUs can expand their approval guidelines is by offering Non-Qualified Mortgages (NQM). These are mortgages that do not meet the requirements for conventional mortgages, but still provide a valuable service to borrowers who would otherwise be excluded from credit access. For example, NQM can be offered to borrowers with lower credit scores, those who are self-employed, those with multiple sources of income and those who do not have a long credit history. By offering NQM, CDCUs can expand their lending services to a broader group of borrowers, while still maintaining sound underwriting practices.
Another thing to consider is Private Mortgage Insurance
(PMI). Inclusiv Mortgage partners with ARCH Mortgage Insurance Company
because they offer premiums that range between 6% & 18% which is substantially lower than the going rates. For many borrowers, these lower rates can mean the difference between qualifying and not qualifying so it’s important to shop around for the best rates on the PMI you offer your borrowers.
Adjustable-Rate Mortgages (ARM) are a scary alternative to many borrowers but in our current high-rate environment ARMs have substantially lower rates than fixed rate mortgages. That lower rate can, for some, make the difference between becoming a homeowner and not. The monthly payment on a $200,000 loan at 6.875% vs. a 5/1 ARM at 5.65% is a difference of $160 representing a huge savings for a lower income borrower. Should fixed rates reverse course and drop down again, this borrower would have the option to refinance into a lower fixed-rate loan.
Another way that CDCUs can expand their approval guidelines is by offering ITIN first mortgages. ITIN mortgages are specifically designed for borrowers who do not have a Social Security number but do have an Individual Taxpayer Identification Number (ITIN). These borrowers are often excluded from credit access because they do not have a Social Security number, but they still need access to credit. By offering ITIN first mortgages, CDCUs can serve a group of borrowers who would otherwise be excluded from credit access. For many credit unions, the thought of making ITIN loans is a scary, high-risk proposition but the actual risk is a paper risk; the reality is that ITIN loans consistently outperform SSN loans. Because of the assumed risk, often times rates offered are substantially higher than current rates but many CUs have evened the playing field between SSN & ITIN borrowers giving them both access to the same loan programs & rates, regardless of the paper risk, enabling more ITIN borrowers to own their own homes.
Inclusiv/Mortgage will soon be instituting major changes to loan programs in an effort to help more under resourced borrowers become homeowners. Here’s a sample of what to expect:
- Lower credit score minimum from the current 620 score to 580
- Higher front-end debt to income ratio (DTI) from 35% to 38%
- A 5/1 & 10/1 ARM to the current 30-year fixed-rate offering
- Same rates for the ITIN 10/1 ARM as the new 10/1 ARM for SSN borrowers
The Community Development Credit Union model is strong, and we encourage our partners to explore ways deepen your lending at this time when homeownership feels more out of reach than ever for many. Choosing to implement some of the changes described here will allow countless families the opportunity to build wealth, all while supporting your own credit union’s growth.